Morgan Stanley gets a $9B lifeline

NEW YORK • Morgan Stanley, averting disaster with a $9 billion lifeline from a major Japanese bank, declared on Monday that it will use that money to pick off smaller rivals.

Just a few days ago, some on Wall Street openly questioned whether the embattled investment bank would be the next to collapse amid a deepening global credit crisis.

Now, Morgan Stanley appears emboldened by the 21 percent stake taken by Japanese lender Mitsubishi UFJ - and, for now, seems to have regained the market's confidence.

Investors poured back into Morgan Stanley shares, which last week plunged 60 percent.

Shares recouped $8.42, or 87 percent, to close at $18.10.

"This is Darwinism finance, literally the survival of the fittest for the banks," said Chris Johnson, chief investment strategist at Johnson Research Group. "This is Wall Street's version of ‘The Amazing Race,' where these companies are going to jump through hoops and rings of fire to rebuild their businesses as quickly as possible."

John Mack, Morgan Stanley's chairman and chief executive, appears to have his eyes on growth now that the nation's No. 2 investment bank is on more solid footing.

Mack, 63, laid out his plan by telling employees in a memo that he "will be looking at acquisitions that might make sense for the firm." Since Morgan Stanley has now converted its structure to a safer retail bank model, the firm wants to expand its network of 500 branches and 8,500 financial advisers.

That's not to say the investment bank is out of the woods. The company's book value, its total assets minus liabilities, remains stunningly low.

Also, there remains reluctance on the part of banks to do business or borrow from one another as the credit crisis deepens. The U.S. government hopes to boost struggling financial companies through a $700 bailout plan; some of that money would be used to recapitalize hobbled U.S. banks through direct investments.

For the most part, analysts appeared relieved.

"Worst case, if confidence does not return, we believe Mitsubishi would likely step in to protect its investment by buying a majority stake in Morgan Stanley," said James Mitchell, an analyst with Buckingham Research Group. He said such a transaction would combine.

The government was instrumental in ushering through a deal for Morgan Stanley by assuring Mitsubishi UFJ that its investment would be protected. The Japanese lender, the world's second-largest bank, agreed late Sunday on amended terms.

Under the revised deal, Mitsubishi will receive only preferred shares, with $7.8 billion eventually convertible to common stock. The original deal called for Mitsubishi to receive a mix of preferred and common stock. The new deal enables Mitsubishi to receive a dividend on the investment and calls for a lower conversion price when the preferred stock is converted to common stock.

Aside from the cash investment, Mitsubishi will receive a seat on Morgan Stanley's board of directors, and the pair plan to work jointly as part of a global strategic alliance.